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Federal taxes can be confounding in any typical year. But the Republican-led Congress’ mad dash to approve the most sweeping tax overhaul in three decades has left many households unsure of what changes might await them come Jan. 1 and what they should do — if anything — before or after then.
Here are some things to know.
For individuals, the legislation generally lowers rates across income levels. It retains the number of tax brackets — seven — but changes the rates that apply to particular income levels. For a couple filing jointly, the brackets will be 10 percent for taxable income up to $19,050, 12 percent on $19,050 up to $77,400, 22 percent on income to $165,000, 24 percent up to $315,000, 32 percent to $400,000, 35 percent to $600,000 and 37 percent on income above $600,000.
These rates don’t include the effects of deductions, which could change someone’s marginal tax rate. The marginal rate is the highest rate that applies to a taxpayer’s income. But under the bill, the individual tax rate cuts aren’t permanent; they’re set to expire in 2026.
Taxpayers, on average, would receive a $1,600 tax cut in 2018, according to an analysis by the Tax Policy Center, though about 5 percent of households would pay more. The policy center says middle-income households would receive a tax cut of about $900 while the top 1 percent would get a tax cut of about $50,000.
By 2027, after most individual income tax provisions expire, more than half of taxpayers would pay more tax than under current law.
One potential way to take advantage of next year’s lower tax rate would be to defer income, if possible, from 2017 into 2018. An employee could, for example, ask her employer to defer an annual bonus until next year. Or freelancers or business owners could delay submitting invoices until 2018, so that the eventual payment would become part of next year’s income and be subject to a lower tax rate.
The bulk of Americans don’t itemize their tax deductions. They instead benefit from claiming the standard deduction. Under the bill, the standard deduction will roughly double to $12,000 for individuals and $24,000 for couples. As a result, a greater share of these taxpayers’ income will be shielded from tax. And because of the new cap on itemizing state and local tax deductions, households that previously itemized may now fare better by taking the standard deduction. (The increased standard deduction is also scheduled to expire in 2026.)
Taxpayers who have itemized their deductions but will likely take the standard deduction next year might consider making full use of their deductions during 2017. This could include making charitable contributions or paying for unreimbursed business expenses before year’s end.
But if a household’s deductions — for charitable giving, mortgage interest, state and local taxes of up to $10,000 and other items — exceed $12,000 (or $24,000 for a couple), it can still itemize and claim the higher amount.
Yet the bill doesn’t just provide new benefits; it also takes away some. An example is the personal exemption. A taxpayer can now deduct from his income a $4,050 exemption for himself, his spouse and each dependent. So while the standard deduction is doubling, that benefit could be offset for families by the elimination of the personal exemptions.
CHILD TAX CREDIT
The child tax credit, which helps parents offset the cost of raising children, will double from $1,000 per child to $2,000. The bill also makes up to $1,400 of the credit refundable. This means you can claim that portion of the credit even if your income if too low for you to owe tax.
This is a credit, so it’s particularly valuable because it directly reduces your tax bill — not just your taxable income. Taxpayers don’t have to itemize to receive it. The credit will begin to phase out once a household’s adjusted gross income hits $200,000 for individuals, or $400,000 for couples.
Still, because of how it’s written and because of other tax changes, the increased child credit won’t provide much help for low- and middle-income families. About 10 million children in the lowest-income working families would receive a token increase of $75 at best, if any at all, according to the Center on Budget and Policy Priorities. That’s because the size of the credit depends on a taxpayer’s income; lower-income workers don’t earn enough to receive much of a credit. And about 1 million children will be denied the credit because they lack a Social Security number, another new addition to tax law under the bill.
On top of that, the child tax credit also expires in 2026.
The bill limits the deduction to interest paid on the first $750,000 of a loan for a newly purchased first or second home. The current limit is $1 million. That means people who would like to buy a home in an expensive market may encounter a tax disincentive to do so. This could also make it harder for home owners in those markets to sell their houses.
A homeowner who is affected by this tax change might consider making an extra mortgage payment in 2017 before the tax changes reduce the portion of their mortgage interest that they can deduct next year.
STATE AND LOCAL TAXES
The tax plan ends the unlimited federal deduction for state and local income and sales taxes. Taxpayers will now be allowed to deduct only up to $10,000 in combined property and state and local income taxes.
This could hurt people with heavy tax burdens in such high-tax states as New York, New Jersey and California. And the architects of the Republican bill barred taxpayers from prepaying in 2017 any state or local income taxes that will face next year.
While the bill doesn’t expressly address the prepayment of property taxes, doing so might be ill-advised.
You can only pay property taxes that you have already been assessed for, says Mark Steber, chief tax officer at Jackson Hewitt. Every taxing authority runs on a different schedule, so the timing of your assessment will vary by location.
So if you have a bill for property taxes due now or early next year, go ahead and pay it now, he says. What you shouldn’t do, Steber says, is pay this year for taxes that haven’t been assessed yet because that runs against the intent of tax law.
Check with your local taxing authority to see what your options are.
The legislation cuts taxes on business income — specifically for business people whose profits are “passed through” and taxed at their personal tax rate. Many experts argue that his will provide an incentive for taxpayers to become independent contractors and restructure their salaries as business income. A high-income earner who would otherwise have to pay the top rate of 37 percent would pay roughly 30 percent on pass-through income.
The bill tries to prevent the abuse of this provision through various measures. One will bar some occupations, such as lawyers, from exploiting this provision. Still, clever accountants may find a way around those rules. If so, it might be worth checking with your accountant next year to see if it makes sense to set up an LLC or other partnership and reap the benefits.
The bill retains deductions for medical expenses not covered by insurance for 2018 and 2019 once expenses exceed 7.5 percent of adjusted gross income. That rises to 10 percent starting in 2020.
And it repeals the requirement in Barack Obama’s health care law that people pay a tax penalty if they don’t buy health insurance.